Switching funds is like changing your flight plan

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29 June 2018
Switching investment funds is like changing your flight plan and if done incorrectly could adversely affect your end destination.

When it comes to investing you might have heard that timing a market (when to invest) is not really a great idea, but when it comes to switching, timing and a sensible reason however can be important.

Before you decide to throw in the proverbial towel and switch your investment fund it is always good to ask yourself why. Is your reason for switching circumstantial or emotional?

Emotional reasons for switching

My investment fund is not doing well at the moment. My investment funds are down. My “braai buddy’s” investment is doing better. The state of the economy is terrible. Do any of these perhaps sound familiar?  

Circumstantial reasons (life events) for switching

My investment time horizon has changed – I would like to invest for a longer or shorter period. I have just had a baby, got married or divorced so my priorities and goals have changed. I had a promotion or lost my job. My advisor miss-advised me when they built my investment plan.

The difference

Switching your investment funds for emotional reasons usually does not end well and you might not be better off in the long run.

Switching for circumstantial reasons or life events on the other hand makes sense. Life events force you to re-evaluate your original financial plan and require logical adjustments while emotional decisions tend to drive bad investment behaviour usually to the detriment of your financial future.

When switching you are effectively altering your original financial plan and hence the permutations of this action needs to be properly understood. Consider the following analogy:

Say you wanted to attend a conference in London and so you book a direct flight. London is your goal (investment objective) and the direct flight (investment fund) is your means of getting there. That’s your plan A - a direct flight to London to attend a conference.

But unfortunately you miss your flight due to traffic issues (change in circumstances - life happens) and as such are forced to book a new flight but you can’t find a direct flight.

Finally you have a solution, however it will take you twice as long to get there as you have to stop over in various countries. This is now your plan B – same destination, same objective just using a different vehicle – connecting flights.

The implications (risks) of this change of plan is that you might be more exhausted as the flight is longer, you might miss your connecting flights and you might not get to your conference on time.

It could also be more costly. You have effectively switched from plan A to B due to unforeseen circumstances beyond your control (life event). In this case the change of plan (the switch) made complete sense and still got you to your desired destination albeit a little longer and more complicated and with a few extra risks to consider.

If you bought a ticket to Paris that would make no sense as you wanted to get to London. (An emotional decision tends to make no sense)

When it comes to switching your investments it must make sense in the scheme of things (your greater financial plan) or else you might end up at the wrong financial destination.

When switching you are effectively tinkering with your original financial plan and hence should be done with great care and a sober understanding of all risks and possible outcomes.

Getting financial advice before switching funds is essential – it could mean the difference between enjoying a cuppa tea in London or a bagel in France, both sound great, unless you really wanted tea! 

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